Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1+’ ratings on bank loan facilities, non convertible debentures and commercial paper of 5paisa Capital Ltd (5paisa).

 

The rating continues to centrally factor in the expectation of continued support from the promoters and promoter owned entities, primarily IIFL Finance Ltd (IIFL Finance). The rating also reflects the healthy capitalisation of the company and its established track record in the equity broking segment. These strengths are partially constrained by the high competitive intensity of, and inherent uncertainties in, the capital market allied businesses, and the moderate, albeit stabilizing, earnings profile of the company.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated the business and financial risk profiles of 5paisa and its subsidiaries (5Paisa P2P Limited, 5Paisa Corporate Services Limited (Formerly 5Paisa Insurance Brokers Limited), 5Paisa Trading Limited and 5Paisa International Securities Limited). The rating also factors in the expectation of strong support from the promoter and promoter owned entities, primarily IIFL Finance Ltd.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of continued support from promoters and promoter group companies

The promoters, Mr Nirmal Jain and Mr R Venkataraman are first-generation entrepreneurs and veterans in capital market businesses. Over the years, they have scaled diverse businesses like lending, securities and wealth management. As of December 31, 2024, the promoters and promoter group companies cumulatively held 32.77% stake in 5paisa and remain committed to the company’s future growth. They have participated in the various rounds of capital raising in the past, including Rs 45 crore that was raised in August 2022 by way of conversion of share warrants and Rs 250 crore infused earlier in May 2021. Beyond need based financial support, the promoters continue to provide strategic oversight on an ongoing basis. Further, 5paisa benefits from its linkage to other promoter-owned entities – IIFL Finance, IIFL Securities Ltd and 360 One WAM (erstwhile IIFL Wealth Management Ltd), which have demonstrated track record of providing funding support mainly via inter-corporate deposits (ICD). Presently, the company has a board approved ICD line of Rs 600 crore collectively from IIFL Group Companies.

 

Apart from the promotors, the company also benefits from the presence of an experienced senior management team.

In May 2024, Mr. Narayan Gangadhar tendered his resignation from the position of Chief Executive Officer (CEO) of 5Paisa, on account of personal reasons. In the interim, the promoters continue to provide strategic guidance to the entity while the day-to-day operations are being managed by the senior management team.

 

On January 17, 2025, the board has approved the appointment of Mr. Gaurav Seth as an additional director in the capacity of Managing Director as well as Chief Executive Officer (CEO) with effect from January 17, 2025, subject to the approval of the Shareholders.

 

* Established track record in the equity broking segment; ability to retain market share amid increasing competition remains critical

The company has been offering products and services through an online platform and mobile application since its inception in fiscal 2017. It benefitted significantly from the heightened retail market participation (both in terms of frequency and volume) witnessed during the lockdown imposed after the outbreak of Covid-19. Led by the same, the company’s active client base increased to 17.5 lakhs as of March 31, 2022, from 8.7 lakhs, a year ago. Correspondingly, its market share based on volumes traded increased to 1.3% in the cash segment and 1.6% in F&O segment during fiscal 2022.

 

However, with decline in retail participation in the equity markets followed by regulatory restriction on brokers to give incentives for opening accounts/transacting, the base of active clients for 5Paisa fell to 7 lakhs as on March 31, 2023 and further to 5 lakhs, a year later. During this period the company also revamped its approach towards client acquisition, which also contributed to the decline in the number of active clients. Over 9M2025, the number of active clients further reduced to 4.9 lakhs. In terms of client acquisition, backed by its price penetration strategy, the company onboarded around 7.4 lakh new customers in fiscal 2024, resulting in a total client base of 42.3 lakh on March 31, 2024, higher than 34.9 lakh client base as on March 31, 2023. It further increased to 47.4 lakh as on December 31, 2024. With regards to overall turnover, the market share[[1]] of the company for fiscal 2024 was ~0.9% in the cash segment, ~1% in F&O segment and at an overall level, it was ~1%. This was marginally lower than last year’s market share of 1.2% - influenced by decline in active client base. For the first quarter of fiscal 2025, the overall market share was 0.8%.

 

Over the medium term, the company’s ability to expand its base of active clients and restore its overall market share will remain a key monitorable.

 

* Adequate capitalisation

Regular fund infusions have aided the capitalisation of the entity, over the years. In the last round, the promotors infused Rs 45 crore in fiscal 2023 by means of conversion of share warrants. Prior to that, the company had received Rs 250 crore via preferential issue in May 2021. Reported networth and gearing stood at Rs 540 crore and 0.6 times, respectively, as on March 31, 2024 (Rs 463 crore and 0.4 times, respectively, as on March 31, 2023). The networth further increased to Rs 593 crore as on December 31, 2024 on account of internal accretion. The company has deployed these funds in upgrading its technology infrastructure to ultimately improve the quality of service to its customers. After the advent of new regulations on margin funding, while borrowings have increased corresponding to rise in portfolio, overall gearing is expected to remain comfortable at 1-1.5 times on a steady-state basis.

 

Over the medium term, networth remains comfortable for the current and proposed scale of operations and, will continue to lend stability to operations, particularly amid volatile phases in the capital market.

 

Weaknesses

* Exposure to intense competition and uncertainties inherent to capital-market-related businesses, including regulatory changes

As businesses are restricted within the capital market, 5paisa faces intense competition from multiple players offering low-cost products. The industry has seen a huge transformation in the last four years, with the entry of technology-based discount brokers, who are dominating the market share. The proposed entry of players with deeper pockets may intensify pricing pressure across the industry.

 

The key broking business remains exposed to economic, political and social factors that drive investor sentiment. Given the cyclicality associated with the capital market, brokerage volume and earnings are highly dependent on the level of trading activity. Specifically, after March 2020, the stock markets saw high retail participation and daily trading volume on account of people staying at home during the lockdown to contain the Covid-19 pandemic. A significant proportion of client additions at the industry level are in the age bracket of 25-30 years without significant savings surplus. The upward movement of the key benchmark indices during this period further contributed to the lure of stock market trading and potential gains. Subsequently, even though the lockdown restrictions were lifted by many state governments by July 2020, the momentum of increased retail participation continued to sustain over the trailing 12 months. While this benefited 5paisa as well as other broking players, the heightened retail market participation corrected to its pre-pandemic level after the macro situation restored in fiscal 2023. In the long-term, sustainability of the market momentum will remain a key monitorable.

 

Further, over the last couple of years, the broking industry has witnessed continuous changes in regulations. In order to enhance transparency and curb misuse of funds, SEBI has introduced few regulations in the past 3-4 years. Some of these include upfront margin collection for intraday positions and limiting the use of power of attorney, with the most recent being a revised Equity Index Derivatives Framework that is expected to hit derivatives volumes, ultimately impacting revenue and profitability of brokers. This development comes alongside a revision in the transaction charge structure introduced by market infrastructure institutions (MIIs) on September 27, 2024, which will directly impact profitability of brokers, especially discount brokers

 

Regulations of upfront margin collections for intraday trading are likely to reduce leverage to 4-5 times from 10-15 times prevalent across the industry. This reduction in leverage will also affect the level of positions (in terms of volume) taken by retail investors. The impact of this change on performance of 5paisa will be a monitorable.

 

Furthermore, with an aim to increase investor protection and market stability, SEBI has also introduced measures to be implemented in a phased manner. These include the upfront collection of margin premium, removal of cross margin benefit on offsetting positions, intraday monitoring of index derivatives position limits, increase in minimum contract size, increase in margin on short options contracts and, lastly, limiting weekly index derivative products to just one benchmark index per exchange

 

Additionally, on account of the announcement on the Union Budget 2024-25, the extent of impact of the increased tax rates in long term capital gains (LTCG), short term capital gains (STCG) and securities transaction tax (STT) on the earnings profile of the broking companies, is to be monitored 

 

CRISIL Ratings, nevertheless, will continue to monitor regulations and their impact on 5Paisa’s performance on an ongoing basis.

 

* Moderate, albeit stabilizing, earnings profile

5paisa reported a profit after tax (PAT) of Rs 54 crore on a total income of Rs 395 crore in fiscal 2024 as against a PAT of Rs 44 crore on a total income of Rs 339 crore in fiscal 2023. In fiscal 2024, the company incurred one off expenses of ~Rs 23.1 crore, including Rs 9 crore towards consultant fee for a special project, Rs 8.6 crore towards ESOP, Rs 3 crore professional expenses and Rs 2.5 crore of exchange margin penalty. In fiscal 2023, there was a one-off expense of Rs 7 crore towards reversal of margin penalty to clients. Based on reported PAT, the company’s RoE for the respective fiscals was 10.8% and 10.4% however, upon adjusting for the extraordinary expenses mentioned above, the adjusted RoE would be 15.3% and 12.2%, respectively. For fiscal 2024, the cost to income ratio was high albeit decreasing at 80% (82% for the previous year), largely on account of higher employee costs and one off expenses. Though its effect was offset by a corresponding rise in total revenue led by higher interest income and a growth of 12% in broking & related income. For the nine months ended December 31, 2024, the company earned a profit of Rs 58 crore on total income of Rs 288 crore compared with profit of Rs 49 crore on total income of Rs 282 crore for corresponding period of previous fiscal. This was supported by higher operating efficiency and stable total income. However, on quarterly basis, in quarter three of fiscal 2025, PAT reduced to Rs 16 crore on total income of Rs 85 crore as compared to Rs 22 crore reported on a total income of Rs 101 crore in the previous quarter, due to impact of true to label and discontinuation of weekly derivatives contracts.

 

Ever since it commenced operations in fiscal 2016, the company has made significant investment in technology infrastructure and hired relevant personnel across verticals. Still being in its growth phase, the entity’s operating expenses would remain elevated in the near term and thereafter, stabilize with economies of scale. The broking income is expected to remain the primary channel of earning. In near to medium term, impact of application of uniform transaction charges across volumes will remain a key monitorable. Secondly, its ability to manage cost and improve earnings profile across market cycles, remains critical.

[[1]] CRISIL Ratings’ market share calculation is based on a two legged approach (both buy and sell aspects of the transaction)

Liquidity: Strong

Liquidity remains comfortable as a result of the agency nature of business and healthy pipeline of unutilised cash credit (CC)/WCDL facilities and OD FD facilities of Rs 308.2 crore as on January 31, 2025. All the bank facilities are working capital limits, which are matched against the margin trading facility/receivables exposures extended to clients. As those short-term instruments range between 15 days and three months, the company deposits the amount received from these facilities once they are closed by the client

Outlook Stable

CRISIL Ratings believes that 5Paisa Capital will continue to receive strong support from its promoters and promoter group companies. Company will also continue to maintain adequate capital position.

Rating sensitivity factors

Upward factors

• Cost-to-income ratio improving to and remaining below 65% on a steady-state basis
• Significant and sustained improvement in profitability, along with greater diversification in income profile
• Sustenance of improvement in the market share leading to significant scale-up of operations

 

Downward factors

• Any material change in the shareholding or support philosophy of promoter or promoter group companies impacting the quantum and timing of support
• Impact on business risk profile, indicated by a drop in market share to, and it remaining below 0.75% for a prolonged basis
• Weakening of earning profile

About the Company

5paisa started operations as a discount brokerage platform in 2016 and was a wholly-owned subsidiary of IIFL Holdings Ltd (IIFL Holdings; erstwhile listed holding company of IIFL group entities) until 2016. Post the demerger of 5paisa from IIFL Holdings in fiscal 2017, and the subsequent listing of the company, the shareholding pattern mirrored that of IIFL Holdings. As of December 31, 2024, the promoter and promoter group held 32.77% stake and the Fairfax group owned 32.80%.

 

The company offers financial products through its online technology platform and mobile application. It targets retail investors and high-volume traders who actively invest and trade in securities and seek DIY (do-it-yourself) services at a low cost.

Key Financial Indicators

As on / for the year ended March 31		2024	2023	2022
Total assets	Rs crore	2048	1642	1608.6
Broking & Allied income	Rs crore	238.7	213.9	195.8
Total income	Rs crore	394.7	339.3	297.9
PAT	Rs crore	54.4	43.5	13.7
Cost to total income*	%	80	82	93
Return on networth	%	10.8	10.4	5.0
Gearing	Times	0.6	0.4	0.7

 *Total expense minus interest cost/Total income minus interest cost

 

As on December		2024	2023	2022
Broking & Allied income	Rs crore	186.5	185.3	172.7
Total income	Rs crore	288.3	281.7	247.3
PAT	Rs crore	58.2	48.6	29.0
Cost to total income*	%	71	76	84

 *Total expense minus interest cost/Total income minus interest cost

Any other information:

Crisil Ratings has taken note of the search initiated by Income Tax Department (IT Department) of the registered office of IIFL Finance and group companies (including 5Paisa) on January 28, 2025. Management has indicated that the search under the Income Tax Act,1961 ended on February 3, 2025 and the IT Department is yet to share its report or findings. Crisil Ratings will continue to monitor progress on the same.

 

Vide its credit bulletin dated March 21, 2024, CRISIL ratings had earlier taken note of the MCX and NSE order on 5Paisa.

 

On July 1, 2024, the Member and Core Settlement Guarantee Fund Committee (MCSGFC) of the MCX passed an order levying a monetary penalty of Rs 2,59,75,000/- (plus applicable GST) on the company and further, a non-monetary penalty of restricting on-boarding of new clients for a period of fourteen days from the date of receipt of the order.

 

As a response, the company had filed an appeal against the said order before Hon’ble Securities Appellate Tribunal (SAT). SAT passed an order on July 05, 2024, granting a stay on the operation of the order of MCX subject to deposit of 50% of the penalty amount i.e. Rs 1,30,00,000/- within one week with MCX. The Company promptly deposited the said amount with MCX and the restriction, so imposed was revoked across Exchanges.

 

The case remains pending at the court and hearing is expected to take place in September, post which the final order will be passed.

 

However, during first quarter of fiscal 2025, the company has made a provision for the penalty amount.